The market consensus is that Analog Electronic Corporation has an ROE = 8% and a
ID: 2712114 • Letter: T
Question
The market consensus is that Analog Electronic Corporation has an ROE = 8% and a beta of 1.75. It plans to maintain indefinitely its traditional plowback ratio of 1/4. This year's earnings were $3.4 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 13%, and T-bills currently offer a 6% return.
a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price $ 16.01
b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
P/E ratio of:
1. Leading 4.62
2. Trailing
c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
PVGO $
d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 3/4. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Intrinsic value of the stock $
Explanation / Answer
=6%+ (13%-6%)x1.75
= 18.25%
G = roe X plow back ratio
= 8% x ¼
= 2%
Do = EPS x (1- plow back ratio)
= 3.40 x (1 – ¼)
= 2.55
Price = Do x(1+g)/(ke-g)
= 2.55 x(1+0.02)/(0.1825 -0.02)
=2.601/0.1625
= 16.01
b) P/E ratio = Price/ EPS
= 16.01/3.40
c) PVGO = price – EPS/Ke
= 16.01 -3.40/0.1825
= -2.62
d) G = roe X plow back ratio
= 8% x 3/4
= 6%
Do = EPS x (1- plow back ratio)
= 3.40 x (1 – 3/4)
= 0.85
Intrinsic value = Do x(1+g)/(ke-g)
= 0.85 x(1+0.06)/(0.1825 -0.06)
=7.36
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